The UK government has introduced a new merged R&D tax relief scheme, effective from 1 April 2024, replacing the previous SME and RDEC schemes. This reform simplifies the tax relief system and ensures that businesses involved in research and development have fair access to tax incentives, making the UK an attractive destination for innovation.

Foreign companies looking to establish R&D operations in the UK can benefit significantly from these tax incentives. The new framework offers a 20% above-the-line credit on eligible R&D expenses, which is treated as taxable income. In addition, small and medium-sized enterprises (SMEs) that spend at least 30% of their total budget on R&D may receive extra benefits, including a 14.5% non-taxable credit and enhanced tax deductions. These changes aim to support businesses that prioritize research and technological advancements.

To further promote UK-based innovation, the government has also introduced stricter regulations on R&D tax relief claims. For example, subcontracted and overseas R&D activities are now subject to restrictions, except in cases where the work cannot reasonably be conducted in the UK. Moreover, the new scheme incorporates a more generous PAYE and NIC cap from the previous SME model, making it easier for businesses to carry forward any excess R&D tax credits.

The decision to merge the schemes was a response to concerns over inefficiencies and fraudulent claims, especially in the SME scheme. By consolidating the two systems, the government aims to prevent abuse while encouraging genuine investment in R&D. This shift is also expected to create a more transparent and predictable framework, helping foster innovation and economic growth in the UK.

Businesses planning to claim tax relief under the new scheme will need to maintain comprehensive records of their R&D activities, including project details, technical documentation, and financial records, in order to meet HMRC’s strict eligibility requirements. Proper documentation will be essential for securing tax benefits and ensuring compliance with the new regulations.

With a more streamlined approach, better support for innovative businesses, and a focus on domestic progress, the new scheme offers a great opportunity for companies to leverage government incentives. By adapting to this new framework, businesses can drive research, develop breakthrough technologies, and contribute to the UK’s economic growth.

Niloofar Foroozanfar